Chapter 1

The Role of Financial

Management
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2001 Prentice-Hall, Inc.

Fundamentals of Financial Management, 11/e
Created by: Gregory A. Kuhlemeyer, Ph.D.
Carroll College, Waukesha, WI

The Role of
Financial Management

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What is Financial
Management?

The Goal of the Firm

Organization of the Financial

Management Function

What is Financial
Management?
Concerns the acquisition,
financing, and
management of assets
with some overall goal in
mind.
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Career Opportunities in
Finance

Money & Capital Markets

Banks,

Insurance Companies, Mutual Funds,

Investment Banking

Investments
Brokerage

Houses, Investment Banks, Consultancy

Firms

Financial Management
Government,

Institutions
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Hospitals, Schools, Banks, Financial

Investment Decisions
Most important of the three
decisions.

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What is the optimal firm size?

What specific assets should be

acquired?

What assets (if any) should be

reduced or eliminated?

Financing Decisions
Determine how the assets (LHS of
balance sheet) will be financed (RHS
of balance sheet).
What is the best type of financing?

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What is the best financing mix?

What is the best dividend policy?

How will the funds be physically

acquired?

Asset Management
Decisions

How do we manage existing assets

efficiently?

Financial Manager has varying degrees

of operating responsibility over assets.

Greater emphasis on current asset

management than fixed asset
management.

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What is the Goal

of the Firm?
Maximization of
Shareholder Wealth!
Value creation occurs when
we maximize the share price
for current shareholders.
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Financial Goals of the

Corporation
The

primary financial goal is

shareholder wealth
maximization, which translates
to maximizing stock price.

What

factors determine the

price of a companys stock?

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Maximization of
Shareholder Wealth
Share

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Price is dependant on:

Profit Maximization

Projected EPS

Riskiness of the earning stream

Timings of the earnings

Use of debt financing

Dividend policy

Investment decisions

Is stock price
maximization good or
Stock price
requires
badmaximization
for society?
Low

cost business, high quality goods at

lowest possible cost

Development

of products that customer

needs and want

Efficient

service, adequate stock of

merchandise, well located business
establishments (factors that leads to sales)

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The Modern Corporation

Modern Corporation
Shareholders

Management

There exists a SEPARATION

between owners and managers.
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Role of Management
Management acts as an agent
for the owners (shareholders)
of the firm.

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An agent is an individual
authorized by another person,
called the principal, to act in the
latters behalf.

Agency Theory
Jensen

and Meckling developed

a theory of the firm based on
agency theory.
theory

Agency

Theory is a branch of
economics relating to the
behavior of principals and their
agents.

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Conflicts Between Managers

and Stockholders

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Managers are naturally inclined to act in

their own best interests (which are not
always the same as the interest of
stockholders).

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Agency Theory
Principals

must provide incentives

so that management acts in the
principals best interests and then
monitor results.

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Agency Relationship

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Incentives include stock options,

perquisites, and bonuses.
bonuses

Following factors affect managerial

behavior:

Managerial compensation plans

Direct intervention by shareholders

The threat of firing

The threat of takeover

Responsibility of the Financial

Staff
Maximize

stock value by:

Forecasting
Investment

and financing decisions

Coordination

and control

Transactions

in the financial markets

Managing

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and planning

risk

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Do firms have any

responsibilities to society at
large?
Social Responsibility
Welfare

of the employees,
customers, & communities

Safe

working environment

Avoid
Safe
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pollution

products
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Should firms behave ethically?

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Business Ethics

Firm & Employee adherence to:

laws and regulations related to product safety &

quality

fair employment practices

fair marketing & selling practices

use of confidential information for personal gain

community involvement

Bribery& illegal payments to obtain business

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Some Important Trends

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Recent corporate scandals have

reinforced the importance of business
ethics, and have spurred additional
regulations and corporate oversight.

The effects of changing information

technology have had a profound effect on
all aspects of business finance.

The continued globalization of business.

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